ECJ C-249/17 (Ryanair Ltd) – Judgment – Input VAT recovery on costs relating to acquisition of shares

Judgment of 17 October 2018 in case C-249/17 (Ryanair Ltd.) regarding input VAT recovery relating to acquisition

Summary

Facts of the Case: Ryanair Ltd incurred VAT on consultancy services during its attempt to acquire shares in another airline. The acquisition was ultimately unsuccessful due to competition law issues, prompting Ryanair to seek VAT deductions on the services related to the failed takeover.
Questions to the Court: The Supreme Court of Ireland referred questions to the CJEU regarding whether Ryanair’s intention to provide management services to the target company, despite the acquisition not being completed, constituted engagement in economic activity under VAT law, thus allowing for VAT deduction on related consultancy expenses.
Decision of the Court: The CJEU ruled that Ryanair, intending to engage in management services subject to VAT, qualifies as a taxable person under VAT law and is entitled to fully deduct the input VAT on consultancy services incurred during the takeover bid, even if that activity was not ultimately carried out.
Justification of the Decision: The court emphasized that the right to deduct VAT is based on the exclusive reason for the expenditure being linked to intended taxable activities. Preparatory acts for future economic activities can constitute economic activity, thereby permitting VAT deductions.
Importance of the Ruling: The decision reinforces the principle that VAT neutrality must be upheld, allowing businesses to deduct VAT on expenses incurred in preparation for intended taxable activities, thus preventing tax burdens on companies seeking to engage in legitimate economic activities.

Article in the EU VAT Directive

Article 4 and 17 of the Sixth VAT Directive.

Article 4(1) and (2)

1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.’

Article 17 of that directive, entitled ‘Origin and scope of the right to deduct’ provides, in paragraph 1, that the right to deduct arises at the time when the deductible tax becomes chargeable.

Article 17(2)(a) of the Sixth Directive states that in so far as the goods and services are used for the purposes of his taxable transactions, the taxable person is entitled to deduct from the tax which he is liable to pay VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.

Facts

Ryanair Ltd. launched a takeover bid for all the shares of another airline (‘the target company’). It incurred, on that occasion, expenditure relating to consultancy services and other services in connection with the planned acquisition (‘the services at issue’). Nevertheless, it was not possible to carry out that transaction fully for reasons relating to compliance with competition law, so that Ryanair was able to acquire only a part of the share capital of the target company.
Ryanair requested the deduction of input VAT paid on that expenditure, stating that its intention, after it gained control of the target company, had been to involve itself in its management by providing management services subject to VAT.
The tax authorities refused that deduction, arguing that no VAT could be deducted on costs relating to a transaction that never resulted in taxable activities.
The Supreme Court asked the following questions to the European Court of Justice:
- Can a future intention to provide management services to a takeover target, in the event that the takeover is successful, be sufficient to establish that the potential acquirer is engaged in economic activity ?
- Can there be a sufficient “direct and immediate link” between professional services rendered in the context of such a potential takeover and output, being the potential provision of management to the acquisition target in the event that the takeover is successful, so as to permit a deduction to be made in respect of the VAT payable on those professional services?

Questions

Can a future intention to provide management services to a takeover target, in the event that the takeover is successful, be sufficient to establish that the potential acquirer is engaged in economic activity for the purposes of Art. 4 of the Sixth VAT Directive so that VAT charged to the potential acquirer on goods or services provided for the purposes of seeking to progress the relevant acquisition can potentially be considered as VAT on an input to the intended economic activity of providing such management services; and

Can there be a sufficient “direct and immediate link”, as identified as a requirement by the CJEU in Cibo, between professional services rendered in the context of such a potential takeover and output, being the potential provision of management to the acquisition target in the event that the takeover is successful, so as to permit a deduction to be made in respect of the VAT payable on those professional services?

AG Opinion

(1) Under circumstances like those in the main proceedings (in the context of a strategic takeover for example), the acquisition of a company’s entire share capital with the intention of thereby bringing about a direct, permanent and necessary extension of the taxable activity of the acquiring company constitutes an economic activity within the meaning of Article 4 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (now Article 9(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax).

(2) Costs incurred by the acquiring company in connection with achieving such a strategic takeover have a direct and immediate link with its taxable activity with the result that the value added tax paid on that expenditure is to be deducted in accordance with that activity.

Decision

Articles 4 and 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment must be interpreted as conferring on a company, such as that at issue in the main proceedings, which intends to acquire all the shares of another company in order to pursue an economic activity consisting in the provision of management services subject to value added tax (VAT) to that other company, the right to deduct, in full, input VAT paid on expenditure relating to consultancy services provided in the context of a takeover bid, even if ultimately that economic activity was not carried out, provided that the exclusive reason for that expenditure is to be found in the intended economic activity.

Summary

A company which intends to acquire all the shares of another company in order to pursue an economic activity consisting in the provision of management services subject to VAT to that other company, has the right to deduct, in full, input VAT paid on expenditure relating to consultancy services provided in the context of a takeover bid, even if ultimately that economic activity was not carried out, provided that the exclusive reason for that expenditure is to be found in the intended economic activity.

Or, in short: Ryanair is allowed to deduct the input VAT.

Source

Curia

Similar ECJ cases referred to

Case C-268/83, Rompelman (1985): This case dealt with the right to deduct VAT paid in preparation for an economic activity. It established that preparatory actions for intended taxable activities may qualify for VAT deduction.
Case C-16/00, Cibo Participations (2001): This case clarified the conditions under which a holding company can deduct VAT on services related to the acquisition of shares in subsidiaries, emphasizing the importance of the intended economic activity.
Case C-651/11, X (2013): This judgment addressed the nature of taxable persons and confirmed that activities that involve managing other entities can constitute economic activity, thus allowing VAT deduction.
Case C-108/14 and C-109/14, Larentia + Minerva and Marenave Schiffahrt (2015): These cases reinforced the principle that a company may have the right to deduct VAT if it is involved in managing other companies, linking the right to deduct to the actual economic activities conducted.
Case C-110/94, INZO (1996): This case discussed the deductibility of VAT in relation to preparatory expenses for future economic activities, establishing that the intention to engage in a taxable activity can justify VAT deduction.
Case C-400/98, Breitsohl (2000): This case highlighted that initial investment expenditures aimed at starting a business should be treated as economic activities, allowing for VAT deductions even if the business has not yet commenced full operations.
Case C-132/16, Iberdrola Inmobiliaria Real Estate Investments (2017): This case reiterated that the right to deduct VAT is integral to the VAT scheme and should not be limited, emphasizing neutrality in taxation across different economic activities.